Research on the economic effects of rent control goes back more than 70 years, to the pubication of a monograph titled “Roofs and Ceilings,” by Milton Friedman and George Stigler. That work found that rent control could be expected to restrict the supply of rental housing and would cause inequities and market inefficiencies, despite the help it provided to some sitting tenants.
Today, rent control is back in the news. California’s Proposition 10 would expand rent control. Lawmakers in Oregon and Illinois are considering similar legislation.
A report from Brookings, written by Stanford economist Rebecca Diamond, looks at recent research on rent control, based on natural experiments that have occurred as cities have extended or narrowed the scope of rent control over the years. Her review of the recent literature suggest that Friedman and Stigler’s conclusions stand up, but also adds some new twists.
A 2014 study by David Autor, Christopher Palmer, and Parag Pathak looked at the effects of rent decontrol in Cambridge, MA. The authors found that decontrol boosted the value both of previously controlled properties and of neighboring properties. They concluded that
Rent controlled properties create substantial negative externalities on the nearby housing market, lowering the amenity value of these neighborhoods and making them less desirable places to live. In short, the policy imposed $2.0 billion in costs to local property owners, but only $300 million of that cost was transferred to renters in rent-controlled apartments.
A 2018 study conducted by Diamond with colleagues Timothy McQuade and Franklin Qian looked at the effects of an extension of rent control to previously exempt small units in San Francisco in 1994. It found that rent control benefitted sitting tenants but reduced the supply of housing. They also found that rent control led to an increase in condominium conversions and construction of high-income housing.
Taking all of these points together, it appears rent control has actually contributed to the gentrification of San Francisco, the exact opposite of the policy’s intended goal. Indeed, by simultaneously bringing in higher income residents and preventing displacement of minorities, rent control has contributed to widening income inequality of the city.
Taken together, the two studies paradoxically suggest that both expansion and removal of rent control cause can cause increases in the value of non-controlled real estate in the affected areas. Diamond explains the seeming paradox occurs because rent control both increases incentives for condo conversion and at the same time reduces incentives to invest in maintenance of controlled units. Thus, expanding controls causes a spurt in conversions while removal of control causes a spurt in catch-up improvements to previously controlled units, with beneficial effects on neighborhood quality.